Can a Trustee in Bankruptcy be liable to the bankrupt for loss caused by breach of duty?

Darren Stone, 6th July, 2017

Earlier this year the Court of Appeal gave judgment in the case of Oraki and another v Bramston and another. The case involved the Court considering the liability of the Trustee in Bankruptcy for an alleged breach of duty to the bankrupts in the conduct of their respective bankruptcies, in particular it was alleged that they had prolonged the administration of the bankruptcy estates and that the bankrupts had been frustrated by them when they were seeking to annul the bankruptcies. Following a seven day trial the claims were dismissed, it was that decision which led to the Appeal.

Dr Oraki and her husband were made bankrupt in quick succession following judgment against them by a firm of solicitors in 2004. A payment in full had been offered but was not accepted as they had refused to withdraw a complaint made by them to the Law Society regarding the solicitors

The Bankruptcy Orders were made in late 2005 and early 2006. In October 2012 it was ruled that the judgment should be set aside and the bankruptcies annulled. The annulment was ordered in January 2013 and was conditional; one condition being the payment of costs and expenses of the bankruptcies, a time limit was also set as a back stop for any application to challenge the conduct of the Trustees.

In the Appeal the claims being pursued were that Dr Oraki and Mr Oraki were due damages for loss allegedly caused to them personally for breach of duty owed to them personally by their Trustees. In the lead judgment of Lord Justice David Richards he described the claims as raising “some novel and difficult issues of law on first, the duties, if any, owed by a trustee in bankruptcy to the bankrupt personally, and, second, if such duties exist, on the effect of a release under section 299 of the Act of a trustee who had ceased to hold office.” The history of the matter was fully set out in the judgment, essentially the claims were for professional negligence in that the trustee in bankruptcy through their acts and omissions failed to carry out their duties to the standard required of insolvency practitioners. It was argued that they ought to have known that the bankruptcy orders ought not to have been made and should have taken steps to bring the bankruptcies to an early end. In not doing so it was alleged that they had prolonged the duration of the bankruptcies and caused the bankrupts loss and mental distress. The Appeal failed on the facts in that there was no breach of duty, nor loss caused as a result of their actions. The section 299 issue was not therefore determined.

Whilst the findings of the Court meant that no investigation of the scope and limit of a trustee’s duty was carried out the Court observed that section 304 of the Insolvency Act provides a framework for claims for the benefit of the bankruptcy estate and whilst it is concerned with, and confined to, acts or omissions on the part of the trustee that have caused loss or damage to the estate and that the bankrupt may only apply under that section with leave of the court. What is of particular not is that it was stated this does not explain why it should be that no duty was owed to the bankrupt or “why section 304(1) provides that the sub-section is ‘without prejudice to any liability arising apart from this section’. Those words are apt to extend any claim for any common law or other duty not falling within the express terms of section 304.”

In observing that that the duties of the trustee may extend beyond section 304 the potential for claims by bankrupts against their trustees for liability arising from breach of duties has been recognised and may well lead to further litigation on the point.

Mayo Wynne Baxter have specialists who can give advice on all matters arising from insolvency of individuals or companies, should you wish to discuss any issues arising from the above please contact Darren Stone, Head of Insolvency at Mayo Wynne Baxter.